Research and Reports

SESSION 3

GSSD Reports

Session 3: Luncheon Session

Financing Sustainability Strategies
Maurice F. StrongSenior Advisor to the President, the World Bank
Chairman, Earth Council

I have been paid the ultimate compliment of speaking to you while introducing myself. I will spend so much time on my introduction that I am not sure I will have much time for anything else. We have had a immensely impressive session this morning.

I really did get a great deal out of the presentations this morning and it is already clear this is going to be a meeting of very formidable impact and importance. And the least important part is that which I now have to play.

I am pleased, though, because it is always good to have an opportunity -- as an operator I am not really a speaker and I am in an audience of immensely important professional speakers and lecturers. I am really an operator, so I welcome a chance to practice my speaking on such an impressive group. However, I am handicapped because I had prepared some notes and unfortunately I lost page 42. If anyone finds it -- if there is anyone left at that point in my speech -- please do not hesitate to come up and hand it to me and I am sure you will earn not only my own gratitude but that of everybody here.

Finance Challenges
What we are talking about: I have been asked to address and I will stick to what Professor Nazli Choucri tells me. I try to do as I am told most times. And I will stick largely to the topic she has asked me to address at this luncheon meeting and that is financing sustainability. But I want to remind you that whatever particular area each of us is addressing in our remarks at this meeting, our larger purpose is to work for the fundamental changes in behavior on the part of individuals, of governments, of business, of international organizations without which the kind of transformation of our society that was called for at Rio will not occur.

Now change is not something that we ordain. It is not that something we can decide to have or not to have. But change is something that we can and must influence because change is occurring.

The question is the nature, the direction, the pace, and the real consequences of change. And we all must have a view of our respective roles in that. We all must have a view of the general direction in which we want to move and of our particular contribution to moving us in that direction. Rio helped to provide that. Not perfect, of course. And we have to while building upon the results of Rio--I always agree with those who say that Rio did not do enough. Did not do this, did not do that. Did not do this right. And that is true.

Rio Context
Rio reflected the state of the world at that time. But rather than simply arguing about that, let us get on with doing the things that it did mandate because, remember, however deficient the accords of Rio may have been, they did represent the agreement of 179 governments, led mostly by their head of government, their president, prime minister or king. So they carry a degree of political authority which is unique, but they do not carry any enforcement capability.

The world community does not work that way, and therefore it is the actors that you represent, the intellectual institutions, the policy institutions, the organizations of civil society, of business, and, of course, government. We tend to downplay the role of government but let us not go too far in that direction. While their role, relatively, is being somewhat diminished, we cannot write governments out of the picture. Governments are going to be central. And intergovernmental organizations are going to continue to be important.

Common Task
So our common task is really this:

How do we consciously help to guide the direction we are taking in our future to ensure that what we produce as a result of our collective efforts is a more secure, more sustainable, more equitable, more high-quality way of life for the people of our planet?

At their Summit in June 1992, developing countries, after difficult and intense negotiations, in which some of you were involved, joined in the consensus which produced agreement on a declaration of principles and an action program to give effect to them, which we call Agenda 21. And two critically important conventions -- one on climate change and the other on biodiversity -- were included, and it laid the foundations for the Convention on Desertification, which has since been negotiated. And at the same time Rio made it clear -- developing countries made it clear -- that they could not be expected to make the transition to sustainable development called for by the Rio agreements without the new and additional financial resources and access to technologies which this transition requires. And Ambassador Razali articulated this morning very well, as he has done in the past, the developing country position on these issues.

Bad News
The bad news is that since Rio official development assistance has actually declined, and a growing proportion of it has been devoted to meeting acute and immediate humanitarian needs, and a lesser percentage to addressing the longer term underlying development deficiencies which give rise to these tragedies.

This is an ominous and worrisome trend, but one which unfortunately seems likely to continue.

Good News
But there is also some good news. Despite their disappointment that the prospects for new and additional financial resources raised at Rio have not been fulfilled, a fair number of developing countries have nevertheless taken some important and promising steps to give effect to Agenda 21 and the other Rio agreements in their own national development policies and practices. They recognize that sustainable development is not just something that they do in response to the exhortations of industrialized countries. It is to set their own national development on a pathway which offers a more secure and sustainable future for their people.

And despite overall declines in official development assistance, some donor countries have been willing to lend increased support to many of these sustainable development initiatives, albeit often at the expense of other initiatives.

Central America
Let me cite Central America as a promising example -- a micro part of the world but one with which I am increasingly familiar. Although the seven countries of Central America are relatively small in relation to the larger developing world of which they are a part, they are in many respects a microcosm of the issues facing most developing countries -- rapid population growth, resource based economies, struggling with the challenge of reconciling modernization with traditional values and practices. And a growing dichotomy between rich and poor, a dichotomy I need not remind you which is not confined to the developing world. The conflicts that have preoccupied the region in recent years have exacted a high price in both human and economic terms.

Success Case
Emerging from this period, the countries of Central America now face the monumental task of rebuilding their societies and have decided to do so through a collective commitment to sustainable development.

Responding to the leadership of peaceful and progressive Costa Rica and its dynamic young president, Jose Maria Figueres, they have established a Central American Alliance for Sustainable Development. And President Figueres has committed his government to making Costa Rica a world-class laboratory for the achievement of sustainable development. The Earth Council, as you may know, has its home in Costa Rica, and we are trying to become partners in fulfilling this vision.

In a recent visit with him President Figueres described how much of the widespread destruction resulting from the aftermath of the torrential rains that afflicted the southern region of Costa Rica recently was clearly attributable to past development practices which had been environmentally unsound and unsustainable. So you will see this is in very real terms a breakdown in sustainability, which has exacerbated immensely the actual consequences of that natural disaster. And President Figueres outlined to me his plans for ensuring that the reconstruction of the region would be designed to provide a positive demonstration of sustainable development.

This, together with the other initiatives being undertaken by Costa Rica and its Central American neighbors, provides a unique opportunity for the international community to lend the kind of support that can turn this region into a sustainable development success story that will encourage and inspire others.

Other Cases
There are many other success stories -- no complete success; nobody has it made. But there is some immensely important progress. China in many ways unfortunately is moving down the same pathway as we -- the same kind of unsustainable development practices. On the other hand, at the policy level it has made a major commitment to a national Agenda 21.

The commitment is very detailed. It is a very serious document. It is one of the best. And a number of other countries have taken similar action at the policy level.

The rapidly developing countries of Asia and Latin America have been leading the resurgence of growth in the global economy and attracting large-scale inflows of private capital. These inflows have grown to the extent that flows of private capital to developing countries on an overall basis, as you know, now surpass official development assistance. But while this has enabled larger and rapidly developing countries to obtain much of the external capital they require, the poorer, least developed countries, particularly in sub-Saharan Africa, continue to be dependent on official development assistance.

Redeploying Resources
The decline in the flows of official funds to developing countries has been accompanied by a recession in political will and financial support for environment and sustainable development in some key industrialized countries, including the one in which we meet. Although I am pleased to see a movement in the other direction at this point in time. The rationale is the need to cut back on national budgets and to concentrate government resources in areas that are seen as being of more immediate domestic interest, particularly in employment.

But evidence now being compiled for a study by the Netherlands Institute for Research on Public Expenditure for the Earth Council makes it clear that hundreds of billions of dollars are now being spent by governments in both industrialized and developing countries on direct and indirect subsidies which provide incentives for policies and practices that are environmentally unsound and unsustainable as well as economically costly and inefficient. This study indicates that in the early 1990s energy subsidies alone amounted to some $350 to $400 billion dollars worldwide. This is almost 2% of world GDP.

It is estimated that removal of subsidies on fossil fuels by OECD countries would reduce their CO2 emissions by 10% to 15% without impairing significantly their economic growth. In other sectors like agriculture, transport, and water, there is an immense potential to combine large-scale economic benefits with environmental improvement through removing or shifting subsidies.

Thus, it is evident that better, more effective use of existing budgetary resources would be more than sufficient to enable OECD countries to make the transition to sustainable development -- to which they agreed at Rio -- while providing developing countries with the support that they will need to effect the transition to sustainability in their economies.

This is not on the basis of simply charitable flows or foreign aid monies. The best cost-effective investment is in their own sustainability, future.

There is no need to question in my mind that the redeployment and reorientation of existing government funding to provide positive incentives to sustainable development offers the single most important and promising prospect for implementing the results of the Earth Summit and moving both industrialized and developing countries onto a pathway to sustainable development.

Emission Trading
As UNCTAD has pointed out, trading of emission permits provides a promising basis for using the market system to channel funds to the place in which they will buy the most reductions in emissions while transferring significant new resources to developing countries.

The Earth Council, in partnership with Center Financial Products -- and you will be hearing something about this, I believe, along the way -- is leading an initiative to establish a global environment trading system -- and to do this firstly for CO2 emissions.

It is now evident, as you will know, that most industrialized countries will not meet the initial targets set for reductions in CO2 emissions. At the same time the rapid growth in energy use by developing countries is producing a corresponding growth in their CO2 emissions while ultimately deepening risks of climate change.

All of this will, of course, force us to modify our patterns of energy production and consumption so as to wean us off our current addiction to fossil fuels. There is very little evidence that we are really fundamentally moving in that direction at present.

Efficiency Gains
In the meantime, an accelerated effort must be made to effect substantial improvements in the efficiency with which we use existing energy resources and to develop alternative non-fossil fuel sources. I should say that some extremely promising progress is being made in this respect right here at MIT. And I also have to make the point that we in the developing countries have got to take the lead in this. We are the ones who brought us up to the current dangerous thresholds.

We cannot expect developing countries to simply respond to our exhortations that they must not do what we have already done and which we are not really showing much willingness to change.

Partnerships Needed
So it has to be done on a partnership basis. There has to be a mutual respect and sharing of benefits if we expect those who share the risks with us on this planet to share with us the responsibility for avoiding, averting and mitigating those risks.

Reductions in governmental funding have made it increasingly important that government financing be directed to those areas which lever and support private sector funding, particularly in providing the public infrastructure and services on which private investment so often depends and cannot normally be expected to finance itself.

Public-Private Partnerships
However, the growing movement to privatization of electric power, transport, water supply and other sectors which in many countries governments have traditionally monopolized is attracting today large amounts of private capital. And there is a growing number of examples of private/public partnerships in which financing is provided through a mix of government and private funds.

The World Bank Group, under its dynamic president, Jim Wolfenson, is leading the way in the countries of the developing world, the former Soviet Union, and Eastern Europe, which it serves in helping its clients to meet this challenge.

The International Finance Corporation, which partners with private investors, and the Multilateral Investment Guarantee Agency, which supports private investment by providing insurance against political and related risks, have been expanding rapidly. And the World Bank itself is reorienting its lending to governments so as to facilitate and support private investment. The IFC is in the process of launching a new private sector fund for financing of renewable energy.

The World Bank Group has also been developing partnerships with private foundations in mobilizing new sources of capital to meet social and educational needs, for which profit-seeking capital is not always available. Administrator Gus Speth is providing enlightened and vigorous leadership to the United Nations Development Program as the principal funding agency of the United Nations system and multiplying the impact of its own scarce funds through mobilizing and stimulating funding from a variety of other sources.

The regional development banks and bilateral donors have also been moving in this direction of constructive financial partnerships.

The net result is that impressive and promising progress is being made on many fronts through the multilateral development agencies to make public and private funding mutually supportive and reinforcing, achieving more bang for the buck for both public and private investment in sustainable development.

GEF
Particularly noteworthy is the role of the Global Environment Facility. You heard about that from Ian Johnson this morning.

It is the only really new financing mechanism to have emerged from the Earth Summit process, having started during the preparatory process and, as he indicated, being very much influenced by it. It is unique in other respects as well. It is a new financing mechanism. Not just a new institution. In fact, it is not an institution at all. It is a facility, a mechanism.

Although it has its own governing body and small core staff under the able leadership of Dr. Mohamed El-Ashry, its funds are actually managed and dispersed through its three partner organizations: the World Bank, the United Nations Development Program, and the United Nations Environment Program. I am very pleased that my good friend and colleague, Elizabeth Dowdeswell, who leads that Program, is here with us and I must say I commend the leadership she has been providing.

And its funding is especially designed to cover the incremental costs of insuring that important projects and programs meet sustainable development requirements, particularly those being undertaken pursuant to the conventions on climate change and biodiversity.

If private investment does not become a positive vehicle for sustainable development, there will be little hope of achieving it. Yet we cannot afford to wait until enforceable international agreements can be reached.

Investment Guidelines
Accordingly, the World Bank has taken the initiative, building on the work of the World Resources Institute, the OECD, and others, to develop voluntary guidelines and criteria for private investment in each of the private development sectors. Now, this is designed to be positive for all actors. Ambassador Katz will tell you he has some reservations about it. We have had some constructive discussions, but business as the prime mover has also got to be a prime partner and indeed beneficiary of this process.

Private Initiatives
Developing voluntary criteria will involve consultations with developing countries, industry, environmental organizations, development finance institutions, and other stakeholders. And it promises, in my view, to make an important, indeed essential contribution to a private sector led transition to sustained development.

There are encouraging examples of private sector leadership in the financing of sustainable development. I just heard of a very key one that has just occurred in respect to UNDP where Hewlett-Packard has made a new agreement, which apparently has just been announced, which really involves multi-year support to developing country clients through UNDP -- and a renewal of their own corporate culture on the theme of Hewlett-Packard for a sustainable future.

One of many business examples: Bjorn Stigson is not here today but I think he may be coming tomorrow (head of the World Business Council for Sustainable Development). He will tell you of some of the examples of leadership they have taken in stimulating and facilitating investment and sustainable government on the part of some 120 major corporations that are its members.

It has also recently produced a new book, Financing Change, co-authored by its founder Dr. Stephan Schmidheiny and the leading Argentine industrialist Federico J. Zorraquin, which follows its influential report to the Earth Summit, Changing Course. It makes a strong and compelling case for the use of the financial markets to finance sustainable development.

Private direct investment is one of the most effective means of transferring technology, because corporations need--they do not always do this--but they need to be encouraged and incented to use the best state of the technologies in their investments in the developing countries. Stephan Schmidheiny himself continues to practice what he has been preaching by developing new mechanisms for investment in sustainable development, particularly in Latin America.

MIT Initiatives
As one of the most encouraging examples in which private entrepreneurs and investors can lead the way, some of these examples are very close to home right here at MIT. As one of the world's leading research universities, MIT continues to be at the forefront of both the fundamental scientific research and its applications through technology with a primary focus on sustainable development.

And I must say I was very encouraged not only by what President Chuck Vest said in his very enlightened remarks today but also by the leadership of MIT in committing this great institution to the concept of sustainable development, of which this meeting is an important manifestation.

MIT has already had notable success in translating the results of its research and development into commercially marketable products and services which contribute substantially to the prospects for realization of sustainable development to the marketplace. And here again this has been done through combinations of government funding which were often the source of the basic science which produced the technology, and then private sector funding moves on to translate the results into real commercial products and services in fields like pollution prevention and control, energy, materials, and resource management.

The Rich Feel Poor
With all of our talk today of a shortage of funds, the rich have never really felt more poor. But let us not forget that we still live in the wealthiest civilization ever known to our species. We are not poor. Many amongst us are poor; and governments are poor; but this is the wealthiest civilization in history. And with all the unevenness that we know about, nevertheless that wealth is increasing year by year.

The use of private capital in areas in which government has traditionally been the primary source of funding is no longer an ideological issue for most. It is a pragmatic response to changing insights and realities. After all, government funds are in the final analysis derived from the same sources as private funds, from people as taxpayers, as lenders to government and as owners of pension funds, investment trusts, and corporations.

It is just that people today have realized that their funds can be utilized more effectively by investing them through private channels rather than entrusting them to governments, and therefore they are entrusting governments with less and less. But that does not mean that we have overall less and less. This has given rise to a proliferation of new and innovative initiatives and financing mechanisms and a new era of creative partnerships between public and private finance.

The New Era
It is an era which has just begun and which I submit opens some extremely promising and exciting opportunities for financing of the transition we must now make to the new sustainable economy of the 21st century. I find this--someone who has been involved in this issue for many years--exciting and promising. We have got to be realistic about the things we have not done, the difficulties we confront in realizing our aspirations.

But we are on a pathway which is literally going to reinvent our technological civilization. It is going to be exciting. There are going to be winners and losers.

The real winners will be those who follow us on this planet. And in the corporate community, in the non-governmental community, in the intergovernmental community, there will be those who will have to shift and change and sometimes see their positions disadvantaged. But, frankly, the process of change is inexorable.

Basic Question
The real question is: where are we going to position ourselves in that process?

We know by the very fact that you are here where you are positioned, and one of my sources of optimism -- and I am guilty of optimism -- is the fact that people of the quality assembled here today share not always every detail and perception but a general commitment to the kind of more secure sustainable, equitable, and high-quality life styles which we hope we will hand on to our children.

I very much appreciate the opportunity of joining with you in this experience and thank you.